Press Conference at the Conclusion of the 2012 Article IV Mission to China

Good afternoon everyone. It is always a great pleasure for me to come to Beijing, and I especially appreciate the generosity of my hosts here in China. So I would like to start by expressing my gratitude for their warm hospitality and highly productive discussions.

I have had the privilege of meeting with Vice Premier Wang Qishan earlier this afternoon and also held in-depth discussions with People’s Bank of China Governor Zhou Xiaochuan, Finance Minister Xie Xuren, and other senior Chinese officials in the past two days.

I am here as part of the annual Article IV consultation and spillovers discussions with China, in other words, our annual policy dialogue with China. The discussions took place at a time of heightened risks to the global outlook, notably from a possible worsening of the European Crisis. Naturally, therefore, we focused on the policies for dealing with this global uncertainty. We also agreed that it was critical not to lose sight of the top medium-term priority of transforming China’s economy to a more consumer demand-based growth model. This transformation would substantially boost living standards in China and contribute significantly to strong and balanced global growth.

Here are some of the key findings of our discussions.

Reflecting the withdrawal of policy stimulus last year and slowing global demand, growth will likely moderate to around 8 percent this year. We support the authorities’ ongoing effort to promote higher quality growth while at the same time fine-tune macroeconomic policies to help ensure that growth does not slow too much. We are also pleased to see that inflation, which was a major social concern last year, has peaked and, barring further shocks to food supply or global commodities, is expected to remain below 4 percent.

The intensifying strains in Europe, however, highlight the significant downside risks to the outlook. China’s timely and large stimulus in 2009-10 succeeded in supporting domestic growth, shielding China’s population from the worst of the crisis, and helping the global recovery by providing a needed lift to world demand. China again has space for a forceful response if necessary, but, this time, on-budget fiscal stimulus should be the main line of defense. Measures should align with the current effort to distribute the benefits of China’s growth more widely through increasing consumption.

The PBC’s interest rate decisions yesterday confirm the authorities’ commitment to achieving their macroeconomic objectives in the face of slowing growth and increased downside risks, especially from Europe. We also welcome the step toward the liberalization of interest rate margins, which will lower the cost of financial intermediation and allow market forces a greater role in pricing loans.

As I turn to medium-term issues, it is useful to pause to look back at China’s amazing development accomplishment. Over the past few decades, China has had a remarkable record of rapid growth and low inflation, which has helped lift several hundred million people out of poverty. This success reflected a continued ability to push ahead reforms, and at the same time, was facilitated by a growth model that relied heavily on capital accumulation. However, this model may be running its course and we fully support the authorities’ efforts to transform to a more consumer-based one that also aims to address rising inequalities by promoting more inclusive growth.

Over the past several years, China has made significant progress in reducing external imbalances. The current account surplus, for example, has declined sharply from 10 percent of GDP in 2007 to less than 3 percent of GDP last year and the real trade-weighted value of the renminbi has appreciated. With these developments, the undervaluation of the currency has been reduced. We now assess the renminbi to be moderately undervalued against a broad basket of currencies.

The external rebalancing, however, has come in large part with an increasing reliance on investment. This brings with it a set of risks around the worthiness of those investments and the sustainability of this approach. As the government acknowledges, reforms are needed to achieve quality growth that relies less on investment, more on consumption, and is environmentally friendly. In our view, these should include measures to raise household income, liberalize the financial system, strengthen the social security system while also lowering social contribution rates, appreciate the exchange rate, and increase the cost of various inputs to production. These priorities also feature in the 12th Five-Year Plan, but timely implementation will be key.

The reform process should go faster to avoid a further build-up of risks, produce a smooth and controlled adjustment to consumer-based growth, and contribute to the rebalancing of the global economy. Without these reforms, domestic imbalances could at some point unwind in a disorderly fashion and trigger an abrupt decline in investment. Our analysis, as part of the spillover report, indicates this would have a significant negative impact on China, commodity prices, and the global economy. More broadly, the spillover report itself highlights the economic tensions in all five systemic economies, and the importance of working collaboratively to resolve them.

From our discussions, we take confidence that the authorities are mindful of China’s role in the global economy.